8-K
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a2089398z8-k.txt
FORM 8-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
September 10, 2002
001-13836
(Commission File Number)
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 04-2297459
(Jurisdiction of Incorporation) (IRS Employer Identification Number)
THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD
PEMBROKE, HM 08, BERMUDA
(Address of registrant's principal executive office)
441-292-8674
(Registrant's telephone number)
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Item 5. Other Events and Regulation FD Disclosure
I.
The appointment of Edward D. Breen as Chairman of the Board of
Directors and Chief Executive Officer of Tyco International Ltd. ("Tyco" or the
"Company"), announced on July 25, 2002, was reported in Tyco's Form 8-K filed on
July 26, 2002. Since that filing, Tyco has made a series of announcements about
appointments of directors and officers that are reflected in the following press
releases.
As previously reported in Tyco's Quarterly Report Form 10-Q for the
period ended June 30, 2002, Tyco announced the appointment on August 6, 2002 of
John A. Krol, former Chairman and CEO of E. I. DuPont, to the Board of
Directors. Tyco's press release announcing this appointment is attached as
Exhibit 99.1 to this report. Also as previously reported in Tyco's Quarterly
Report Form 10-Q for the period ended June 30, 2002, Tyco announced the
appointment on August 6, 2002 of Eric M. Pillmore as Senior Vice President of
Corporate Governance. Tyco's press release announcing these actions is attached
as Exhibit 99.2 to this report.
On September 10, 2002, Tyco appointed David J. FitzPatrick as Executive
Vice President and Chief Financial Officer. Tyco's press release announcing this
appointment is attached as Exhibit 99.3 to this report.
On September 12, 2002, Tyco appointed William B. Lytton as Executive
Vice President and General Counsel. Tyco's press release announcing this
appointment is attached as Exhibit 99.4 to this report.
Also on September 12, 2002, the Board of Directors nominated and
elected five business leaders, Jerome B. York, Mackey J. McDonald, George W.
Buckley, Bruce S. Gordon and Sandra Wijnberg, to fill expected vacancies on the
Board of Directors before the next Annual General Meeting and nominated those
same five persons for election to the Board at the next Annual General Meeting.
The Board also voted not to nominate or support for re-election at the Company's
2003 annual meeting any of the nine current members of the Board who were
members of the Board prior to July 25 of this year. Tyco's press release
announcing these actions is attached as Exhibit 99.5 to this report.
II.
On April 30, 2002 the Corporate Governance and Nominating Committee of
the Board of Directors of Tyco retained Boies, Schiller & Flexner LLP ("the
Boies Firm") "to represent Tyco in connection with the Committee's review and
analysis of transactions between and among Tyco and its subsidiaries and certain
of Tyco's directors and officers, and any litigation arising from or relating to
that review." The members of the Corporate Governance and Nominating Committee
were Lord Michael Ashcroft KCMG, Joshua M. Berman, Richard A. Bodman, and John
F. Fort, III. A written agreement dated May 17, 2002 confirmed the terms of that
retention. The initial focus of
the Boies Firm's work related to the facts and circumstances concerning $20
million in payments made to and for the benefit of former Tyco Director Frank E.
Walsh, Jr. during the time Mr. Walsh was a director of Tyco, and to the conduct
of Tyco's Chairman and Chief Executive Officer (L. Dennis Kozlowski), Executive
Vice President and Chief Financial Officer (Mark H. Swartz), and Executive Vice
President and Chief Corporate Counsel (Mark A. Belnick) relating to such
payments. In connection with the Boies Firm's review and analysis during May
2002, lawyers from the Boies Firm interviewed Tyco officers and directors and
began an analysis of Company documents and data made available by the Company.
On Saturday, June 1, 2002, Tyco's Board of Directors was informed that
its Chairman and Chief Executive Officer ("CEO") L. Dennis Kozlowski was the
target of a criminal investigation being undertaken by the District Attorney of
the County of New York into possible violations of state sales tax laws.
Thereafter, on June 1 and June 2, the Board was informed that Mr. Kozlowski and
the Company's Chief Corporate Counsel Mark A. Belnick had been aware of the
investigation since on or about May 3, 2002; that the Company itself had
received a subpoena in connection with the investigation; that Mr. Belnick had
retained counsel to represent the Company in the investigation; that the
Company's counsel had met with prosecutors and had furnished prosecutors with
data and documents; that it was now expected that Mr. Kozlowski would be
indicted; but that no member of the Board of Directors other than Mr. Kozlowski
and Mark H. Swartz had been informed of the investigation prior to the evening
of May 31, 2002.
On Sunday, June 2, 2002, Tyco retained the Boies Firm to represent it
in connection with negotiations with Mr. Kozlowski regarding his possible
resignation. Those negotiations led to Mr. Kozlowski's resigning from the Tyco
Board and from his position as the Company's Chief Executive Officer early in
the morning of June 3, 2002. (On June 4, Mr. Kozlowski was in fact indicted by
the District Attorney of the County of New York for violations of state sales
tax laws and, on June 26, 2002 he was charged in a superseding indictment with
obstruction of justice relating to the removal of documents subpoenaed by the
District Attorney. The People of the State of New York v. L. Dennis Kozlowski
-Indictment No. 3418/02.)
Upon Mr. Kozlowski's resignation, the Board assigned primary executive
responsibilities for the Company to Tyco's Lead Director, John F. Fort, III. At
that time, Mr. Fort retained the Boies Firm to (as Mr. Fort stated) undertake a
"full and complete" investigation, review, and analysis of transactions between
and among the Company and its subsidiaries and the Company's officers and
directors. That retention was unanimously confirmed by the Tyco Board in the
afternoon of June 3, 2002.
During the week of June 3, 2002, the Boies Firm expanded its interviews
of Tyco officers and directors and its review and analysis of data and
documents. That work has continued through the present and is continuing. On
June 13, 2002 Tyco further expanded the scope of the Boies Firm's work to
include "the use of company funds" and "the Company's accounting and
disclosures." In Tyco's Quarterly Report Form 10-Q for the period ended June 30,
2002 Tyco confirmed the expanded scope of the Boies Firm's
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representation and stated that following the completion of the first phase of
the Boies Firm's review and analysis, the Company would file an 8-K.
On June 17, 2002, Tyco filed a civil complaint in the United States
District Court for the Southern District of New York against Frank E. Walsh,
Jr., its former Lead Director, alleging breach of fiduciary duty, inducing
breaches of fiduciary duty, and related wrongful conduct involving the $20
million payments made to him and on his behalf during the time he served as a
director without authorization by the Company, as required by law. The action
alleges causes of action for restitution, breach of fiduciary duty and inducing
breach of fiduciary duty, conversion, unjust enrichment, and a constructive
trust, and seeks recovery for all of the losses suffered by the Company as a
result of the former director's conduct. TYCO INTERNATIONAL LTD. V. FRANK E.
WALSH, JR., No. 02-CV-4633 (DLC). Tyco's complaint in that action is attached as
Exhibit 99.6 to this report and was previously disclosed in Tyco's Quarterly
Report Form 10-Q for the period ended June 30, 2002.
Also on June 17, 2002, Tyco filed a civil complaint in the United
States District Court for the Southern District of New York against Mark A.
Belnick, its former Executive Vice President and Chief Corporate Counsel,
alleging breach of fiduciary duty and other wrongful conduct. The suit alleges
and seeks to recover unapproved compensation and profits received from his
employment at the Company, repayment of all loans fraudulently procured, with
interest, damages for the harm caused to the Company, and punitive damages. TYCO
INTERNATIONAL LTD. V. MARK A. BELNICK, No. 02-CV-4644 (SWK). Tyco's complaint in
that action is attached as Exhibit 99.7 to this report and was previously
disclosed in Tyco's Quarterly Report Form 10-Q for the period ended June 30,
2002.
On September 12, 2002, the Company filed a civil complaint in the
United States District Court for the Southern District of New York against its
former Chairman and Chief Executive Officer, L. Dennis Kozlowski, alleging
breach of fiduciary duty (including his own breaches, inducing the breaches of
others, and conspiring to breach fiduciary duties), fraud, and other wrongful
conduct. TYCO INTERNATIONAL LTD. AND TYCO INTERNATIONAL (US) INC. V. L. DENNIS
KOZLOWSKI, No. 02-CV-7317 (TPG). The suit seeks to recover actual and
consequential damages, including misappropriated or otherwise unauthorized
payments fraudulently made at Mr. Kozlowski's direction to himself, to Frank
Walsh, and other senior executives and key managers; repayment of outstanding
loans made to Mr. Kozlowski by a Company subsidiary; disgorgement of all
compensation paid to Mr. Kozlowski from 1997 through 2002; forfeiture of all
benefits awarded to Mr. Kozlowski from 1997 through 2002; and compensatory,
consequential, special, and punitive damages suffered by Tyco as a result of Mr.
Kozlowski's wrongful conduct, including his breaches of fiduciary duty and
misappropriations of Tyco funds and assets. Tyco's complaint in that action is
attached as Exhibit 99.8 to this report.
Since June 3, 2002, Tyco has cooperated on an ongoing basis with the
investigation that was then underway by the District Attorney of the County of
New York, as well as with the investigation subsequently undertaken by the
Securities and Exchange Commission ("SEC"). Tyco has furnished the District
Attorney and the SEC
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the information contained in this filing, and related and additional data and
documents. The evidence and information furnished by Tyco contributed to the
District Attorney's investigation, which led to a further indictment of L.
Dennis Kozlowski and to indictments of Mark H. Swartz and Mark A. Belnick,
and to the commencement by the SEC of civil fraud actions against those three
former Tyco executives.
Also, on an ongoing basis, Tyco has cooperated with and provided
information and documents to the following authorities: the Committee on Energy
and Commerce of the United States House of Representatives, the United States
Attorney for the District of New Hampshire, and the Bureau of Securities
Regulation of the State of New Hampshire.
On September 12, 2002, indictments were filed in the Supreme Court of
the State of New York against Mr. Kozlowski and Mr. Swartz alleging enterprise
corruption, fraud, conspiracy, grand larceny, falsifying certain business
records and other crimes, and against Mr. Belnick alleging falsification of
business records. THE PEOPLE OF THE STATE OF NEW YORK V. L. DENNIS KOZLOWSKI AND
MARK H. SWARTZ (Indictment No. 5259/02) and THE PEOPLE OF THE STATE OF NEW YORK
V. MARK A. BELNICK (Indictment No. 5258/02).
Also on September 12, 2002, the Securities and Exchange Commission
filed a civil fraud enforcement action in the United States District Court for
the Southern District of New York against Messrs. Kozlowski, Swartz and Belnick
alleging violation of certain of the antifraud, proxy, periodic reporting and
record keeping provisions of the federal securities laws and seeking
injunctions, penalties and other equitable relief. SECURITIES AND EXCHANGE
COMMISSION V. L. DENNIS KOZLOWSKI, MARK H. SWARTZ AND MARK A. BELNICK, No.
02-CV-7312 (RWS).
On September 13, 2002, in conjunction with the above-mentioned action,
THE PEOPLE OF THE STATE OF NEW YORK V. L. DENNIS KOZLOWSKI AND MARK H. SWARTZ,
Tyco was served with an Order to Show Cause with Temporary Restraining Order
freezing the assets and property of Messrs. Kozlowski and Swartz and their
families and dependents, or property in which either of them has a legal,
equitable, custodial or beneficial interest and upon any debts owing to them.
ROBERT N. MORGENTHAU V. L. DENNIS KOZLOWSKI AND MARK H. SWARTZ.
The improper and unlawful conduct of Tyco's former CEO, CFO and Chief
Corporate Counsel in enriching themselves at the expense of the Company with no
colorable benefit to the Company has damaged Tyco. The amount of money
improperly diverted by Tyco's former executives from the Company to themselves
is very small in comparison with Tyco's total revenues and profits, but it is
very large by any other relevant comparison; and the extent of the former
executives' misconduct has harmed Tyco's reputation and credibility with
investors, lenders, and others. Therefore, in the interest of restoring
confidence in the Company, the extent of the Company's disclosures in this
filing will go beyond what the law requires, or what might ordinarily be
disclosed in other circumstances.
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III.
During at least the five years prior to June 3, 2002, Tyco's three top
corporate officers - its CEO, its CFO, and its Chief Corporate Counsel - engaged
in a pattern of improper and illegal conduct by which they enriched themselves
at the expense of the Company with no colorable benefit to the Company and
concealed their conduct from the Board and its relevant committees. The nature
of such conduct to the extent it is now known by Tyco is described in this
filing and its exhibits.
A. RELOCATION PROGRAMS
-------------------
In March 1995, Mr. Kozlowski decided to open Tyco offices in New York
City and relocate some employees from Exeter, N.H. to New York City and he
proposed a relocation program that would have benefited five or six executives.
Following a legal opinion that the benefits of such an individually-tailored
plan would likely be subject to disclosure as compensation for named executive
officers in the Company's proxy statements, in August of 1995 a broader
relocation program was proposed to, and adopted by, the Compensation Committee
and reported to the Board of Directors (hereafter, the "approved program").
The approved program was "intended not to discriminate in scope, terms
or operation in favor of executive officers or directors of the Company and is
to be available generally to all applicable salaried employees." (As such it did
not need to be disclosed in the Company's proxy statements because SEC
Regulation S-K Item 402(a)(3) Instruction (7)(ii) authorized public companies to
omit compensation associated with such a general relocation plan from
compensation proxy disclosures of named executive officers.) However, Mr.
Kozlowski then implemented a different, more generous New York relocation plan,
tailored to the individual circumstances of five or six executives and one
assistant, which had not been authorized by the Compensation Committee of the
Board. For example, the unauthorized plan permitted reimbursement of school
tuition, and provided for "gross-up" payments of additional compensation to
offset the taxes due on imputed income from the program.
After Tyco's 1997 reverse merger with ADT Ltd., a Bermuda company that
conducted its U.S. operations from Boca Raton, Florida, Mr. Kozlowski decided to
relocate more than 40 corporate employees from Tyco's Exeter, N.H. headquarters
to Boca Raton, FL. Without obtaining the approval of the Board or the
Compensation Committee, Mr. Kozlowski implemented a program similar in
appearance to the New York Relocation Program. As was the case with the New York
relocation, two versions of the program document were crafted: one for general
application, administered through the Human Resources Department; and a second,
more generous plan, maintained in the files of the then-Treasurer, for use by
certain executives only. The second, more generous Florida plan for selected
executives only did not condition participation in the program upon the sale of
a principal residence elsewhere, as did the general program.
As a result of the foregoing, certain executive officers used the
relocation program to receive non-qualifying loans and unauthorized benefits
that were not
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generally available to all salaried employees affected by relocations, or were
not related to any Tyco relocation, enriching themselves with no colorable
benefit to Tyco.
L. DENNIS KOZLOWSKI
-------------------
Mr. Kozlowski improperly borrowed approximately $29,756,000 in
non-qualifying relocation loans to purchase land and construct a home in Boca
Raton, Florida during the years 1997 to 2000, and improperly borrowed
approximately $7,012,000 in non-qualifying relocation loans to purchase a
cooperative apartment in New York City in 2000.
Pursuant to the unapproved New York plan, Mr. Kozlowski:
a. Rented an apartment at 817 Fifth Avenue, New York City, with
annual rent of $264,000 paid for by the Company, from 1997 to
2001.
b. Purchased, using interest-free relocation loans, a $7 million
Tyco-owned apartment at 610 Park Avenue, New York City in
2000, at depreciated book value and without appraisals, which
Mr. Kozlowski deeded to his ex-wife a few months later.
c. Sold his house at 10 Runnymede, North Hampton, New Hampshire
to the Company in 2000 without appraisals for an amount
approximately three times its market value. Less than 24
months later, the Company wrote down this asset by
approximately $3 million.
d. Caused Tyco to purchase a second apartment for his use (with
Mr. Kozlowski as nominee owner) at 950 Fifth Avenue, New York
in 2001 for $16.8 million, and then caused Tyco to spend $3
million in improvements and $11 million in furnishings for
that apartment.
e. Received "gross-up" benefits to avoid having to pay any state
income tax liability incurred after relocating to New York.
Mr. Kozlowski repeatedly abused the New York relocation program solely
for his personal benefit, at the expense of the Company, and in a way that did
not advance the interests of the Company in any colorable way. For example, for
the apartment that was provided to him in New York at 950 Fifth Avenue and that
he maintained for his exclusive use, he caused Tyco to purchase fine art worth
millions of dollars and failed to pay sales taxes. He purchased and decorated
the apartment with appointments and furnishings lacking any legitimate business
justification, including:
o a shower curtain for $6,000;
o a dog umbrella stand for $15,000;
o a sewing basket for $6,300;
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o a traveling toilette box for $17,100;
o a gilt metal wastebasket for $2,200;
o coat hangers for $2,900;
o two sets of sheets for $5,960;
o a notebook for $1,650; and
o a pincushion for $445.
Pursuant to the unapproved Florida plan, Mr. Kozlowski purchased lots
and built a home at 4101 Ibis Point Circle, Boca Raton, Florida, located in a
development called "The Sanctuary." No mortgages were recorded on the Florida
properties, as required by the purported program guidelines and as required to
qualify for tax-exempt status under IRS regulations for interest-free relocation
loans.
The following table sets forth the interest-free "relocation loans"
taken by Mr. Kozlowski since the inception of his relocation program account,
including all loans and charges reflected in the Company's records for Mr.
Kozlowski's relocation account.

In short:
o $7,011,669 in interest free loans was charged by Mr. Kozlowski
for purported New York relocations that did not qualify under
the New York Relocation Program,
o $29,756,110 in interest free loans was charged by Mr.
Kozlowski for the acquisition of property under an
unauthorized Florida relocation program, and
o $24,922,849 in interest free loans was borrowed by Mr.
Kozlowski for the acquisitions of other properties that were
not authorized by any relocation program.
Of Mr. Kozlowski's total $61,690,628 of unauthorized interest free
relocation loans:
o $21,697,303 were actually repaid by him, but without interest;
o $19,439,392 were repaid through unauthorized forgiveness,
discussed in the next section, that he bestowed upon himself;
and
o $20,553,933 were reclassified to other Mr. Kozlowski loan
accounts that he maintained with the Company.
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MARK H. SWARTZ
--------------
Mr. Swartz was Tyco's CFO from 1995 through August 2002, and a Tyco
director from February 2001 through August 2002. In March 1996, Mr. Swartz used
relocation program loans to purchase two properties: one at 24 Straw's Points
Road, Rye, New Hampshire and another in the Trump International Hotel and Tower
Condominium, 1 Central Park West, New York. Mr. Swartz's New Hampshire purchase
did not qualify for a relocation loan. The purchase price of Mr. Swartz's New
York apartment exceeded the maximum amount Mr. Swartz was authorized to borrow
under the approved New York relocation program, and he used relocation loans to
finance 100% of the purchase price, which was not permitted under the approved
relocation program. Mr. Swartz's New York loan also violated the approved
relocation program terms because Mr. Swartz did not make that property his
principal residence.
Mr. Swartz also borrowed approximately $20,992,000 in unauthorized
relocation loans purportedly to purchase property in Boca Raton, Florida during
the period 1997-2000. Neither of these programs was authorized by the
Compensation Committee or the Board.
The following table sets forth the interest-free "relocation loans"
taken by Mr. Swartz since the inception of his relocation program account,
including all loans and charges reflected in the Company's records for Mr.
Swartz's relocation account.

In short:
o $7,668,750 in interest free loans were taken by Mr. Swartz
for property acquisitions in New York and New Hampshire under
the unauthorized New York Relocation Program,
o $20,992,000 in interest free loans were taken by Mr. Swartz
under an unauthorized Florida relocation program, and
o $4,437,175 was borrowed, interest-free, for the acquisition of
other properties that were not authorized by any relocation
program.
Of Mr. Swartz's total $33,097,925 of unauthorized interest free
relocation loans:
o $10,786,977 was repaid by him, but without interest;
o $9,792,000 was repaid through forgiveness that Mr. Kozlowski
was not authorized to bestow; and
o $12,518,948 was reclassified to other Mr. Swartz loan accounts
that he maintained with the Company.
MARK A. BELNICK
---------------
Mr. Belnick served as Tyco's Executive Vice President and Chief
Corporate Counsel from September 1998 until June 10, 2002. Mr. Belnick used the
unauthorized version of the New York relocation program to borrow approximately
$4,217,000 from September 1998 through May 2001 for the purchase and improvement
of a cooperative apartment in New York City at 300 Central Park West. Prior to
purchasing that apartment, Mr. Belnick lived at 103 Pleasant Ridge Road,
Harrison, New York, less than 50 miles from 300 Central Park West, and his prior
employer was also located in New York City. Thus Mr. Belnick's interest free
loans could not qualify as tax-exempt below market loans under the Internal
Revenue Code. And because his loans were pursuant to the unauthorized plan, Mr.
Belnick's indebtedness did not qualify for nondisclosure in the Company's
proxies. Mr. Belnick also used the relocation program to pay his rent for
several months while his new apartment was being renovated.
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From 2001 through March 2002, Mr. Belnick borrowed an additional
$10,418,599 to purchase land and build a home at 3468 West Crest Court, Park
City, Utah. Mr. Belnick then charged Tyco $1600 per month for his home office
located in that house. The Company maintains no corporate offices in Utah, and
Mr. Belnick was not requested to relocate to Utah. A trust agreement, not a
mortgage, was recorded on the property to secure the loans made by Tyco. In
addition, Mr. Belnick executed none of the documents required by the program. In
short, this indebtedness was not incurred through an authorized employee
relocation plan available generally to all salaried employees, and as such was
not exempt from disclosure in the Company's proxies. There was no colorable
benefit to Tyco for any of Belnick's loans.
In the civil action against Mr. Belnick referred to above, Tyco is
seeking recovery of, INTER ALIA, all costs and expenses incurred by Tyco as a
result of Mr. Belnick's unauthorized relocation loans, plus interest, a
constructive trust on the property Mr. Belnick wrongfully obtained, and other
damages.
OTHER EXECUTIVE OFFICERS
------------------------
The following describes the relocation loan activity of Tyco's
executive officers as defined by Section 16 of the Securities Exchange Act of
1934 and identified in Tyco's proxy statements during the Relevant Period.
JERRY R. BOGGESS. Mr. Boggess is currently President of Tyco's Fire and
Security Services division. Mr. Boggess borrowed a total of $5,000,000 in
relocation loans to purchase property in Boca Raton in 1997. This loan was
forgiven and grossed-up as part of the TyCom Bonus in September 2000 discussed
in the next section, which had not been approved by the Compensation Committee.
Mr. Boggess also borrowed an additional amount which was purportedly forgiven by
Mr. Kozlowski in January 2002. Upon learning that Mr. Kozlowski was not
authorized to have forgiven this loan, Mr. Boggess requested the reinstatement
of the loan, with reversal of the related gross-up as if the loan had not been
forgiven and he has now repaid this loan.
STEPHEN B. MCDONOUGH. Mr. McDonough served as the President of Tyco
Engineered Products and Services and later as President of Tyco's Plastics
division until one month ago, when his employment with Tyco terminated. Mr.
McDonough borrowed $1,750,000 in relocation loans to move from Tyco offices in
New Jersey to Massachusetts. This was a genuine relocation, but it was not part
of a broad based plan. His outstanding relocation loan balance of $1,750,000 is
payable within ninety days.
NEIL R. GARVEY. Mr. Garvey served as President and Chief Executive
Officer of TyCom Ltd., a Tyco subsidiary, until July 19, 2002. Mr. Garvey
borrowed $5,000,000 in relocation loans related to his relocation to New
Hampshire in 2000. Mr. Garvey's loan exceeded approved program guidelines by
$472,703. Mr. Garvey's entire $5,000,000 loan is outstanding, and the Company is
seeking repayment of the balance.
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B. THE "TYCOM BONUS" MISAPPROPRIATION
----------------------------------
The Compensation Committee of the Tyco Board of Directors was
established to oversee the compensation and benefits of the executive officers
and key managers of the Company and its principal subsidiaries. (July 7, 1997
Organizational Meeting for the post-merger entities. Unanimous Written
Resolution of the Board of Directors of ADT Limited at 2.) Tyco's 2000 proxy
statement indicates that the Compensation Committee "sets the Compensation and
benefits of executive officers and key managers of the Company...and approves
all of the policies under which compensation is paid or awarded to the Company's
executive officers and key managers and oversees the administration of executive
compensation programs." (Definitive Proxy Statement, Form DEF 14A, filed March
1, 2000 at 7 and 16.)
In September 2000, Mr. Kozlowski caused Tyco to pay a special,
unapproved bonus to 51 employees who had relocation loans with the Company. (The
entire list is set forth in Exhibit 99.8 to this report at 115.) The bonus was
calculated to forgive the relocation loans of all 51 employees, at a total cost
of $56,415,037, and to pay compensation sufficient to discharge all of the tax
liability due as a result of the forgiveness of those loans. This action was
purportedly related to the successful completion of the TyCom Initial Public
Offering. The total gross wages paid by the Company in this loan forgiveness
program were $95,962,000, of which amount Mr. Kozlowski received $32,976,000 and
Mr. Swartz $16,611,000.
The distribution of this benefit is summarized in the following chart:

Listed below are key managers of Tyco in addition to Messrs.
Kozlowski and Swartz who received unauthorized loan forgiveness and
"gross-up" bonuses pursuant to the September 2000 program conceived and
implemented by Mr. Kozlowski. The Company is not aware of any evidence that
any senior executives or key managers participated with Mr. Kozlowski in
developing the loan forgiveness and gross-up bonus program.
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These benefits were not approved by, or disclosed to, the Compensation
Committee or the Board of Directors. Indeed, the opposite occurred: each of the
fifty-one participating employees who was offered the forgiveness was asked to
sign a confidentiality agreement in which they agreed not to disclose either the
fact of the bonus or its terms to anyone other than the recipient's personal
financial, tax or legal advisors. Breach of this confidentiality agreement would
result in forfeiture of the bonus. Some employee beneficiaries of this
forgiveness were not even permitted to keep a copy of their signed agreement.
According to Ms. Patricia Prue, Tyco's Senior VP of Human Resources,
Mr. Kozlowski told her to process the forgiveness and the gross-ups and asserted
that the Board had approved the program. Upon Ms. Prue's request for
documentation of the authorization, Mr. Kozlowski sent her and her supervisor,
Mark Swartz, a memo on September 11, 2000, for her files indicating that "a
decision has been made to forgive the relocation loans for those individuals . .
.whose efforts were instrumental to successfully completing the TyCom IPO."
Attached to the memorandum was the list of employees who were to receive the
forgiveness benefit.
Mark Foley, a Vice President of Finance prepared a memorandum signed by
Mr. Swartz that explained the accounting treatment for the near-$100 million
charge. The memo stated:
"The sale of 14% of TyCom generated a one-time gain of
approximately $1.76 billion on the books of Tyco. We have decided to
award special bonuses to various Tyco employees for their efforts over
the past few years in enhancing the value of TyCom and thereby
contributing to this gain. Selected employees will receive their bonus
in the form of cash, forgiveness of relocation loans, and/or Tyco
Common shares under Tyco's restricted stock program."
As a result of this accounting treatment, this extraordinary $100
million charge was allocated to several different accounts and appears in the
general ledger and financial statements as follows:
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-------------------------------------------------------------------------------------------------
ACCOUNT EXPENSE
-------------------------------------------------------------------------------------------------
TYCOM OFFERING EXPENSE $44,642,065
On the Income Statement of Tyco US as a component of "Other (Income)
Expense"
-------------------------------------------------------------------------------------------------
ACCRUED G & A EXPENSES
ABalance Sheet account and offsets previous $11,772,973
overaccruals of General & Administrative Expenses.
-------------------------------------------------------------------------------------------------
ACCRUED FEDERAL INCOME TAX $40,977,616
A Balance Sheet account used for corporate income taxes.
-------------------------------------------------------------------------------------------------
TOTAL $97,392,654
-------------------------------------------------------------------------------------------------

In short, the program was discriminatory in scope, terms or
operation in favor of executive officers. First, forgiveness was offered to
some people who never moved, some people at the operating division level who
were never part of the corporate relocation to Florida and people who did not
even have a Tyco mortgage. Second, forgiveness was never offered to those who
were originally eligible for relocation, yet declined to move. In short,
forgiveness was never part of the Florida Relocation Program, but rather was
an extra-program benefit. Regardless of advice that may have been offered
relating to the disclosure requirements for nondiscriminatory relocation
benefits, the forgiveness benefit was not applied in a nondiscriminatory
fashion as part of a nondiscriminatory program and, therefore, should not
have qualified for nondisclosure.
All of the forgiveness benefits were individually reported on separate
W-2s, yet none of the income associated with the forgiveness benefits was
reported in the Company's proxies for the Named Officers, i.e. Kozlowski and
Swartz in the year 2000.
The civil action against Mr. Kozlowski referred to above seeks recovery
of all funds misappropriated by Mr. Kozlowski from Tyco, including any unpaid
balances of non-qualifying relocation loans and all debts and obligations
improperly forgiven by Mr. Kozlowski, including all related costs and expenses
of benefits bestowed by him on other Tyco personnel under the TyCom Bonus
program. The Company also intends to seek comparable remedies against Mr. Swartz
in arbitration.
C. THE "ADT AUTOMOTIVE BONUS" MISAPPROPRIATIONS
--------------------------------------------
Only a few weeks after the unauthorized forgiveness and gross-up of
Florida relocation loan liability, Mr. Kozlowski introduced a second bonus
program. On November 13, 2000, Mr. Kozlowski sent a letter to 16 of the
Company's executive officers and key managers thanking them for their many
contributions towards the successful divestiture of Tyco's ADT Automotive
business and enclosing bonuses and "relocation" payments. Each of the intended
recipients of the purported relocation benefits had already recovered all of the
grossed-up costs associated with their recent relocations as part of the near-
$100 million unauthorized forgiveness program just
17
completed. The total of the additional ADT Automotive cash bonus and
"relocation" benefits were $3,979,000 and $32,009,641, respectively.
Mr. Kozlowski's letter noted that information regarding the vested
shares had already been previously communicated and that the amounts listed were
reviewed and approved by the Chairman of Tyco's Compensation Committee. The
total number of shares awarded was 261,500 with a then market value of
$14,804,038. Ms. Prue and Mr. McGee received additional awards at the same time
amounting to $5,161,776, although these benefits were accounted for differently.
Thus, the total benefits awarded at the time of the ADT Automotive
divestiture were, and total cost the Company was, approximately $55,954,455.
The distribution of this benefit is summarized in the following chart:

Again, there is no record that this ADT Bonus program or any of its
elements, which cost the Company over $55 million, was ever approved, discussed,
or even known, by the Compensation Committee or the Board of Directors, despite
the fact that Compensation Committee approval was required for the compensation
and benefits of executive officers and key managers of the Company. (Definitive
Proxy Statement, Form DEF 14A, filed March 1, 2000 at 7.) Since no records exist
to suggest the accuracy of the Mr. Kozlowski assertion and since no one member
of the Compensation Committee was empowered to bind the entire Committee in any
event, the award of the ADT Automotive bonus was also an unauthorized and
unilateral award by Mr. Kozlowski.
As with the TyCom unauthorized bonus, other senior executives were led
by Mr. Kozlowski to believe that the ADT Automotive award of restricted shares
was a Board-approved program. Mark Foley, Senior Vice President of Finance,
produced from his files a memorandum from Mark Swartz, that explains the
accounting treatment for approximately $50 million of associated charges. The
memo states:
The automotive business was sold for $1 billion and
generated a one-time gain in excess of $400 million on the
books of Tyco. We have
18
decided to award special bonuses to various Tyco employees
for their efforts over the past few years in enhancing the
value of the Automotive business, and thereby contributing
to this gain. Selected employees will receive their bonus
in the form of Cash, forgiveness or relocation loans,
and/or Tyco Common shares under Tyco's restricted stock
program.
The associated personnel charges were netted against the direct selling
costs associated with the ADT Automotive divestiture. The separate awards to two
officers received at the same time amounting to $5,161,776 were not booked to
the direct selling costs of the ADT Automotive divestiture.
As was the case with the TyCom Forgiveness Bonus, the unauthorized
purported relocation benefits were individually reported on the employee's 2000
W-2s - again on a separate W-2.
None of these benefits was approved by, or disclosed to, the
Compensation Committee or the Board of Directors. Moreover, the existence and
extent of the program was concealed from the Board by Mr. Kozlowski who had only
a few months earlier signed a proxy solicitation stating that the role of the
Compensation Committee included the approval of "all of the policies under which
compensation is paid or awarded to the Company's executive officers and key
managers." In short, in November 2000, Mr. Kozlowski authorized Tyco to pay
cash, award property and restricted shares of Tyco common stock, and purportedly
forgive the same relocation loans (and make related tax payments) to those Tyco
officers and employees - notwithstanding that the relocation loans of each of
these persons had already been paid in full as a result of the September 2000
misappropriation described above.
The civil action against Mr. Kozlowski referred to above seeks recovery
of all funds misappropriated by him from Tyco, including cash, stock and
purported "relocation loans" improperly forgiven by Mr. Kozlowski, including all
related costs and expenses of benefits bestowed by him on other Tyco personnel.
The Company also believes that Mr. Swartz is jointly and severally liable with
Mr. Kozlowski for this misappropriation, and intends to seek comparable remedies
against Mr. Swartz in arbitration.
D. KEY EMPLOYEE LOAN PROGRAM
-------------------------
As previously disclosed in Tyco proxy statements and Forms 10-K, the
Key Employee Loan Program was intended to encourage ownership of Tyco common
shares by executive officers and other key employees. The Program was intended
to provide loans ("KEL" loans) on favorable terms to these officers to enable
them to pay taxes due upon the vesting of shares granted under Tyco's restricted
share ownership plan without having to sell the shares at the time of vesting to
pay the resultant tax liability.
During the fiscal years from 1997 to the present (the "Relevant
Period"), certain executive officers used KEL loans for purposes other than the
payment of taxes due upon the vesting of restricted shares, borrowed more than
the limits allowed under the program's terms, or both. (Loans that were used for
purposes other than the payment of
19
taxes on vested shares are referred to herein as "non-program loans.") Neither
the Compensation Committee nor the Board of Directors was aware of any
non-program loans or loans in excess of program limits.
L. DENNIS KOZLOWSKI.
-------------------
Mr. Kozlowski, a member of the Tyco Board, a longtime Tyco officer and
a signatory of Tyco's annual proxy statements, knew the KEL loan program's
stated purpose and its limitation on the amounts that could be borrowed. During
the Relevant Period, Mr. Kozlowski borrowed funds for purposes other than those
stated in the KEL program and used the KEL program like an unlimited line of
credit. In addition to taking non-program loans, Kozlowksi borrowed in excess of
the KEL program's limits. Mr. Kozlowski concealed his misuse of the KEL program
from the Board and Compensation Committee.
Mr. Kozlowski's non-program KEL borrowing principally occurred in 1999
and afterwards. As of August 1998, Mr. Kozlowski's total KEL account balance was
$132,310. By August 1999, Mr. Kozlowski's outstanding balance had increased to
over $55.9 million. By the end of 2001, Mr. Kozlowski had taken over 200 KEL
loans - some for millions of dollars, and some as small as $100. Mr. Kozlowski
used these loans to purchase, develop and speculate in real estate; to fund
investments in various business ventures and partnerships (including private
ventures in which both he and Mr. Swartz used Tyco KEL loans to invest); and for
miscellaneous personal uses having nothing to do with any taxes due on the
vesting of his shares of Tyco stock.
According to Tyco records excerpted below, approximately 90% of Mr.
Kozlowski's KEL loans were non-program loans, which he used to fund his personal
lifestyle, including speculating in real estate, acquisition of antiques and
furnishings for his properties (including properties purchased with unauthorized
"relocation loans"), and the purchase and maintenance of his yacht.
The following table sets forth each of Mr. Kozlowski's KEL loans,
including the journal entry used to describe the purpose for which the money was
used and the resulting total loan balance (including both authorized program
uses and non-authorized non-program loans), during the Relevant Period. Balances
after the date of August 31, 1999, reflect the effect of a $25 million
unauthorized credit (discussed INFRA) that has been reversed by Tyco and all
balances thereafter should be adjusted accordingly.
KEL ACCOUNT
L. DENNIS KOZLOWSKI
OCTOBER 1, 1997 - JUNE 30, 2002

Because Mr. Kozlowski generally abandoned his investment in the Company
by selling substantially all of his restricted shares when they vested (or
shortly thereafter - thus violating both the spirit and the letter of the KEL
program), all of his loans are now due and payable. As described above, Mr.
Kozlowski was indicted on September 12, 2002 for using the KEL loan program as a
vehicle for misappropriating millions of dollars from Tyco. Mr. Kozlowski's
total principal outstanding balance under the KEL program (including adjustments
for improperly classified loans), as of June 30, 2002, was approximately
$43,841,000, plus accrued interest.
MARK H. SWARTZ
As Chief Financial Officer since 1995, a Tyco director since 2001, and
signatory of Tyco's Proxy Statements, Mr. Swartz knew the authorized purpose for
the KEL
27
program and of the limits on the amounts that could be borrowed under the
program. Mr. Swartz was responsible for approving and monitoring the KEL loans
of senior management, including Mr. Kozlowski's KEL loans. As such, he was aware
of the nature and extent of Mr. Kozlowski's loans. As a Tyco director, Mr.
Swartz was responsible for reporting any issues relating to those loans to the
Compensation Committee.
Mr. Swartz, like Mr. Kozlowski, borrowed millions in non-program loans.
Like Mr. Kozlowski, Mr. Swartz used those unauthorized loans to purchase,
develop and speculate in real estate; to fund investments in various business
ventures and partnerships (including private ventures in which both he and Mr.
Kozlowski used Tyco KEL loans to invest); and for miscellaneous personal uses
having nothing to do with the ownership of Tyco stock. In general, Mr. Swartz's
loans were for short duration and he generally reduced his indebtedness to zero
each year.
The following table sets forth each of Mr. Swartz's KEL loans,
including the journal entry used to describe the purpose for which the money was
used and the resulting total loan balance (including both authorized program
uses and non-authorized non-program loans), during the Relevant Period. Balances
after the date of August 31, 1999, reflect the effect of a $12.5 million
unauthorized credit (discussed INFRA) that has been reversed by Tyco and all
balances thereafter should be adjusted accordingly.

Mr. Swartz also generally abandoned his investment in the Company by
selling substantially all of his restricted shares when they vested or shortly
thereafter - thus violating both the spirit and the letter of the KEL program.
As described above, Mr. Swartz was indicted on September 12, 2002 for conspiring
with Mr. Kozlowski to use the KEL loan program as a vehicle for misappropriating
millions of dollars from Tyco. Mr. Swartz's total principal outstanding balance
under the KEL program (including adjustments for improperly classified loans),
as of July 18, 2002 was approximately $2,853,025, plus accrued interest.
OTHER EXECUTIVE OFFICERS.
Following is a summary of KEL borrowing by other executive officers
during the Relevant Period.
MARK A. BELNICK. Mark Belnick borrowed a total of $8,603,218 under the
KEL program during the Relevant Period. None of Mr. Belnick's KEL loans is
outstanding.
JERRY R. BOGGESS. Mr. Boggess borrowed a total of $4,461,645 under the
KEL program during the Relevant Period. None of Mr. Boggess's outstanding loans
is outstanding.
NEIL R. GARVEY. Mr. Garvey borrowed a total of $1,342,572 under the KEL
program during the Relevant Period. None of Mr. Garvey's KEL loans is
outstanding.
STEPHEN B. MCDONOUGH. Mr. McDonough borrowed a total of $675,767 under
the KEL program during the Relevant Period, all of which was for authorized
purposes. His current outstanding loan balance as of June 30, 2002 was $113,767.
ROBERT MEAD. Mr. Mead borrowed various amounts under the KEL program
during the Relevant Period, for authorized purposes. None of Mr. Mead's KEL
loans is outstanding.
RICHARD J. MEELIA. Mr. Meelia borrowed various amounts under the KEL
program during the Relevant Period, all of which were for authorized
purposes. None of Mr. Meelia's KEL loans is outstanding.
The civil action against Mr. Kozlowski, noted above, seeks to recover
the unpaid balances owed by Mr. Kozlowski, plus interest and costs, and all
other expenses and costs incurred by the Company as a result of his approval of
unauthorized loans. The Company is taking steps to recover any other
unauthorized loan amounts, including
30
interest. Tyco is also currently evaluating the KEL program in light of the
recent enactment of a prohibition upon loans by public companies to directors
and executive officers.
E. ATTEMPTED UNAUTHORIZED CREDITS TO KEY EMPLOYEE LOAN ACCOUNTS
In August 1999, at Mr. Kozlowski's and Mr. Swartz's direction, entries
were made in Tyco's KEL records that purported to reduce $25,000,000 of Mr.
Kozlowski's outstanding KEL indebtedness, $12,500,000 of Mr. Swartz's KEL
indebtedness, and $1,000,000 of the KEL indebtedness of another employee. This
was done without the knowledge or approval of the Compensation Committee.
Mr. Kozlowski, through his attorneys, has acknowledged to Tyco that he
sought no approvals for these credits and that, if they were entered as a credit
to his KEL account, it was done so improperly. Mr. Swartz was advised that the
credit was unauthorized and has also agreed to repay his forgiven indebtedness
with interest. Thus Tyco has reversed these unauthorized entries, after notice
to investigating authorities.
Tyco's civil action against Mr. Kozlowski includes claims to recover
these amounts based upon these unapproved credits, with interest, and all
related costs and expenses of these unauthorized transactions. Mr. Swartz has
repaid most of his indebtedness and reduced his KEL balance to approximately $3
million.
F. EXECUTIVE COMPENSATION
Mark A. Belnick was hired as Tyco's Chief Corporate Counsel in August
1998. Mr. Kozlowski sent Mr. Belnick a letter confirming their agreement
concerning employment and compensation. The letter described Mr. Belnick's cash
compensation as "a base salary of $700,000 per year; a sign-on bonus of
$300,000; a guarantee cash bonus of $1,500,000 the first year; $1,000,000 the
second year; and $1,000,000 the third year, with his first bonus payable with
the fiscal year end September 30, 1999." The letter also gave Mr. Belnick
100,000 restricted Tyco shares, vesting over three years, and 500,000 options,
also vesting over three years. Mr. Kozlowski submitted this letter to Tyco's
Human Resources department as the actual agreement of the parties.
In fact, Messrs. Kozlowski and Belnick had secretly agreed to
additional terms that tied Mr. Belnick's compensation to Mr. Kozlowski's
compensation, thereby giving Mr. Belnick an undisclosed incentive to aid and
facilitate Mr. Kozlowski's improper diversion of Company funds to Mr.
Kozlowski's personal benefit. The undisclosed terms of Messrs. Kozlowski's and
Belnick's agreement were incorporated in a letter - also dated August 19, 1998
and signed by Mr. Kozlowski - which Mr. Kozlowski did not disclose to the Tyco
Board, the Board's Compensation Committee, or the Tyco Human Resources
department. Mr. Belnick did, however, keep a copy of the undisclosed agreement
in his personal office. The undisclosed version of Mr. Belnick's agreement with
Mr. Kozlowski included a provision that Mr. Belnick's bonus would not be less
than
31
1/3 of Mr. Kozlowski's bonus. The second version also included two additional
paragraphs, which provided:
You will also be entitled to participate in and benefit from
(proportionate to your position) all existing and future benefit plans
and programs that are available for senior executive officers of the
Company. Accordingly, among other benefits, you will be entitled to
participation in Tyco's relocation program to New York City,
participation in the Company's 401(k) Plan, the use of a car and either
a Company loan or a re-load of restricted shares in connection with
your tax liability on the same of previously restricted shares.
If for any reason the relationship does not work out to your
or the Company's satisfaction and you leave the Company prior to
September 30, 2001, the Company will pay you until then your base
salary and guaranteed cash bonuses, less the sign-on bonus, (regardless
of your income or earnings from other employment). You would also
retain in full the sign-on bonus, restricted shares (whether or not
still restricted) and your stock options.
In April 2000, Mr. Kozlowski awarded Mr. Belnick 100,000 restricted
shares of stock, with 50,000 shares vesting on September 30, 2000 and 50,000
shares vesting on September 30, 2001. In July 2000, Mr. Kozlowski awarded Mr.
Belnick an additional cash bonus of $2 million, separate from and in addition to
his agreed upon bonus (which Mr. Belnick now claimed was $2 million); along with
an additional grant of 200,000 shares of restricted stock - all vesting one year
later. None of this additional compensation was reported to, or approved by, the
Board or its Compensation Committee.
Adding the $4 million in bonuses to Mr. Belnick's base compensation
made Mr. Belnick one of Tyco's four highest paid executive officers other than
the chief executive officer. In fact, adding just the $2 million guaranteed
bonus to Mr. Belnick's other compensation would have put him in that category.
Tyco's proxy statement for fiscal 2000 did not disclose Mr. Belnick's
compensation. In order to avoid disclosing his compensation, Mr. Belnick caused
$1 million of the $2 million guaranteed bonus to be characterized as a special
bonus, purportedly relating to a transaction with TyCom. As a result of this
reclassification, $3 million of Mr. Belnick's bonuses was considered
non-recurring and was thus excluded from the computation of Tyco's four highest
paid executives, dropping Mr. Belnick out of that category.
Mr. Belnick's actual compensation in 1999, 2000 and 2001 was as
follows:
1999: $700,000 base salary; $1,500,000 guaranteed bonus; $179,990 in
loan interest forgiveness; $3,388,258 in restricted stock vesting; and
$1,906,799 in proceeds from the exercise of stock options (of a total
of 1,000,000 options granted); total compensation (after adjustments
for deferred compensation and other matters, but excluding unexercised
stock options): $6,916,004
32
2000: $750,000 base salary; $2,000,000 guaranteed bonus (though
$1,000,000 was re-classified as a "special bonus"); $2,000,000 in
another "special bonus"; $231,445 in loan interest forgiveness;
$197,485 in gross-up payments to compensate for taxes on the imputed
income from his loan interest forgiveness; $6,035,803 in restricted
stock vesting, and new options to purchase 200,000 shares of stock;
total compensation (after adjustments for deferred compensation and
other matters, but excluding unexercised stock options): $10,442,331
2001: $762,500 base salary; $50,000 in an undefined "special bonus";
$300,010 in loan interest forgiveness; $255,420 in gross-up payments to
compensate for taxes on the imputed income from his loan interest
forgiveness; $15,592,042 in restricted stock vesting; and more options
to purchase 200,000 shares of stock; total compensation (after
adjustments for deferred compensation and other matters, but excluding
unexercised options): $16,973,344
Upon learning of the facts regarding Mr. Belnick's income, and his
additional borrowing of over $14.4 million in zero-interest "relocation loans"
for which he did not qualify (described above in Relocation Programs) and which
were not approved by the Compensation Committee, and other misconduct, Tyco on
June 17, 2002 filed a civil action against Mr. Belnick in the United States
District Court for the Southern District of New York, TYCO INTERNATIONAL LTD. V.
MARK A. BELNICK, No. 02-CV-4644 (SWK). That action asserts claims for breach of
fiduciary duty and other wrongful conduct, and seeks damages in the form of
recovery of unauthorized compensation, forfeiture of all compensation,
consequential damages, a constructive trust, an accounting, and punitive
damages.
G. PERQUISITES
During the Relevant Period, both Mr. Kozlowski and Mr. Swartz each
received auto and aircraft perquisites from Tyco that, in the aggregate,
exceeded $50,000 per year. The annual amounts for those years were as follows:

These perquisites were reported on their W-2s and required to be
reported in a proxy to the extent they exceeded $50,000. However, these amounts
were not reported in the proxy because Mr. Kozlowski and Mr. Swartz represented
that they would reimburse the Company for amounts in excess of $50,000. However,
in most cases Messrs. Kozlowski and Swartz failed to reimburse the Company for
all perquisites in excess of $50,000.
33
In addition, Mr. Kozlowski caused Tyco to make available to him various
properties that the Company owned for his purported business use. Tyco has now
discovered that Mr. Kozlowski periodically made personal use of the following
properties at the following times: 10 Runnymede, North Hampton, NH (post July 6,
2000); 471 East Alexander Palm Rd., Boca Raton, FL (from 1997 to 2001); 817
Fifth Avenue, NY, NY (from 1996 to 2001); 950 Fifth Avenue, NY, NY (from 2001 to
2002); 167 Little Harbor Rd., New Castle, NH (from 1995 to 2002). The value of
these personal uses that had no colorable benefit to the Company was also not
reported. In its civil action against Mr. Kozlowski, Tyco seeks to recover for
all personal use of business properties.
H. SELF-DEALING TRANSACTIONS AND OTHER MISUSES OF CORPORATE TRUST
KOZLOWSKI EVIDENCE TAMPERING. At least for the last five years, Mr.
Kozlowski has systematically abused his position and caused Tyco to expend funds
for his personal benefit, which did not advance the Company's interest in any
colorable way. For example, after his violation of the sales tax rules led to
the service of a subpoena on the Company, he caused Tyco not to comply with a
subpoena. Concerned only with protecting his wrongdoing from discovery, he
tampered with evidence subject to a subpoena, and risked exposing the Company to
an obstruction of justice claim.
KOZLOWSKI BARGAIN SALE. Upon Mr. Kozlowski's instructions, a Tyco
subsidiary purchased a cooperative apartment in New York City in November 1998
for $5,547,248 and made subsequent improvements to it. Without authorization
from, or approval by, the Board or its Compensation Committee, Mr. Kozlowski
purchased this property from the Tyco subsidiary in May 2000 at the
depreciated book value of $7,011,669, rather than its then current market
value. In its civil action against Mr. Kozlowski, Tyco seeks to recover for
this bargain sale.
OVERPAYMENT TO KOZLOWSKI. Without disclosure to, or approval by, the
Board or its Compensation Committee, Mr. Kozlowski and others caused a Tyco
subsidiary to purchase property in Rye, New Hampshire from Mr. Kozlowski on July
6, 2000 for approximately $4,500,000. After an appraisal in March 2002 valued
the property at $1,500,000, Tyco wrote down the carrying value of the property
to the appraised value and charged Mr. Kozlowski's $3,049,576 overpayment to
expense. In its civil action against Mr. Kozlowski, Tyco seeks to recover this
overpayment.
KOZLOWSKI NON-LEGITIMATE BUSINESS EXPENSES. Mr. Kozlowski also used
millions of dollars of Company funds to pay for his other personal interests and
activities during the Relevant Period, including a $700,000 investment in the
film "Endurance"; more than $1 million for an extravagant birthday party
celebration for his wife in Sardinia; over $1 million in undocumented business
expenses, including a private venture (West Indies Management - $134,113);
jewelry ($72,042); clothing ($155,067); flowers ($96,943); club membership dues
($60,427); wine ($52,334); and an undocumented $110,000 charge for the purported
corporate use of Mr. Kozlowski's personal yacht, "Endeavour." In its civil
action against Mr. Kozlowski, Tyco seeks to recover for these improperly
expensed reimbursements.
34
KOZLOWSKI CHARITABLE CONTRIBUTIONS FOR PERSONAL BENEFIT. Also during
the Relevant Period, Mr. Kozlowski caused Tyco to make donations or pledges to
charitable organizations totaling over $106 million. Of this total, at least $43
million in donations were represented in transmittal letters or otherwise as Mr.
Kozlowski's personal donations, or were made using the Company's funds for Mr.
Kozlowski's personal benefit. Mr. Kozlowski's letters accompanying these
donations or pledges often indicated that they were made "on behalf of L. Dennis
Kozlowski," such as a 1997 pledge to Seton Hall University that enclosed a $1
million Tyco check with a letter signed by Mr. Kozlowski that referred to "my
pledge to Seton Hall University." Mr. Kozlowski made two other million-dollar
pledges to schools under his own name but using Tyco funds, and made several
other pledges that were publicly announced as being from Mr. Kozlowski, or in
which a facility was named after him or his family, even though he had used
Tyco's money to make the pledge.
Most egregiously, in 2001 Mr. Kozlowski donated to the Nantucket
Conservation Foundation, Inc. a total of $1,300,000 in Company money. The
donation was used partially to purchase 60 acres of property called "Squam
Swamp" adjacent to Mr. Kozlowski's own Nantucket estate on Squam Road. The
effect of this gift was to preclude future development of the land and thereby
increase the value of Mr. Kozlowski's home.
In its civil action against Mr. Kozlowski, Tyco seeks to recover from
Mr. Kozlowski for the personal benefit he received from these contributions.
WALSH PAYMENT. In early 2001, Frank E. Walsh, Jr., Tyco's Lead Director
and the former Chairman of its Compensation Committee, recommended to the Board
that Tyco acquire a financial services company, and later proposed that he
introduce Mr. Kozlowski to the Chairman and CEO of The CIT Group, a large
financial services company. Subsequent negotiations led to an agreement for Tyco
to acquire CIT, which closed in June 2001. After the terms of the CIT
transaction had been agreed to, Mr. Kozlowski caused Tyco to pay to and for the
benefit of Mr. Walsh a $20 million fee for his role in the transaction.
Mr. Kozlowski told Mr. Walsh, and Mr. Walsh agreed, that they should
conceal this payment from the Board. None of Tyco's directors (other than
Messrs. Kozlowski, Swartz and Walsh) was aware of the Mr. Walsh payment until
early January 2002, at which time they confronted Mr. Kozlowski and Mr. Walsh
and demanded that the money be returned immediately. Mr. Walsh refused, was not
renominated for election to the Board, and his term expired as of the 2002
annual meeting.
The Board never ratified the Walsh payment, then or later.
Rather, it began a review of executive compensation and Kozlowski's conduct
that culminated in the retention of the Boies Firm as special counsel for the
Company to bring claims against Mr. Walsh seeking to recover the improper fee.
SWARTZ BREACH OF NOMINEE AGREEMENT. Since April 2000, Mr. Swartz has
lived in a Tyco-owned apartment at 30 E. 85th Street, New York. On May 6, 2002,
he caused the
35
Company to enter a notation in its books and records purporting to transfer
title to that apartment, including fixtures and furniture, to himself at its
depreciated book value of $9,646,975, which Swartz paid in cash. No appraisal
was performed in connection with this transfer. The transaction was not
authorized, and on July 18, 2002 Mr. Swartz agreed to reverse that transaction.
Title to the apartment was never conveyed to Mr. Swartz, and Tyco continues to
hold title to the apartment. Swartz's KEL account has been credited $9,646,975
to reflect this reversal.
SWARTZ PERSONAL EXPENSE REIMBURSEMENT. On March 1, 2002, without
approval by the Compensation Committee or the Board, Mr. Swartz caused Tyco to
pay him a reimbursement of $1.2 million to cover lost deposits on personal real
estate transactions involving apartments in Trump Tower on 5th Avenue in New
York. Tyco will seek to recover this improper reimbursement in arbitration.
COMPENSATION COMMITTEE DECEPTIONS. On June 22, 2001, Tyco acquired 15
million shares of Flag, a telecom company for $11,421,810 cash and 5,580,647
TyCom shares. The Company reported a $79,364,700 gain associated with the swap
of TyCom shares for the Flag equity. As a result of the gain, purportedly as
another bonus, accelerated vestings of restricted shares were made to various
key individuals.(1) Each of the executives involved in the grant of restricted
shares sold the shares back to the Company's Newington subsidiary on June 20,
2001 and received wire transfers to their personal accounts in the amounts
indicated in the note below, justified on the basis that the transaction
resulted in a $79 million gain to TyCom. The Compensation Committee approved and
certified the vesting of 290,000 shares for Messrs. Kozlowski and Swartz
only on October 1, 2001 "in conjunction with the gain . . ." on the Flag
transaction. The total cost to the Company related to the award of these shares
was $15,378,700. However, by the end of the quarter (September 30, 2001) and
prior to the October 1, 2001 certification by the Compensation Committee, the
value of the Flag stock decreased substantially, to the point that it was
impaired, thus undermining the basis on which the special bonus vesting was
approved.
Neither Messrs. Kozlowski nor Swartz, who were both members of the
Board of Directors during this time period, ever disclosed this impairment or
the full circumstances of the Flag transaction to the Compensation Committee.
Their entitlement to these bonuses was predicated upon a failure to disclose
relevant facts for their own personal benefit.
Other examples of self-dealing and serious breaches of fiduciary duties
owed to Tyco by Mr. Kozlowski, in particular his deceptions to the Compensation
Committee resulting in the accelerated vesting of his own and other executives'
shares of restricted stock and his entitlement to executive benefits, are the
subject of litigation in Tyco's civil suit against Mr. Kozlowski and are
detailed in that complaint. TYCO INTERNATIONAL LTD. AND
-------------
(1) Kozlowski (155,000 shares with a vesting value of $8,219,650); Swartz
(77,500 shares with a vesting value of $4,109,825); Foley, Prue, Robinson,
and Stevenson (each received 13,500 shares with vesting values of $715,905
each); and MacKay (3,500 shares with a vesting value of $185,605) for an
aggregate cost of $15,378,700.
36
TYCO INTERNATIONAL (US) INC. V. L. DENNIS KOZLOWSKI, No. 02-CV-7317 (TPG),
attached as Exhibit 99.8 to this report. Messrs. Kozlowski's and Swartz's
failure to inform the Board of their own, or each other's, acts of self dealing
was a breach of their fiduciary duties both as members of the Board and
executives of the Company.
I. INFORMATION CONCERNING OTHER TRANSACTIONS BETWEEN TYCO AND ITS
DIRECTORS
In August 1999, Tyco sold assets from its flow control products
division to DLJ Merchant Banking Partners II, an investment partnership in which
John F. Fort III, a Tyco director, was an equity investor. Mr. Fort disclosed
his interest in the prospective purchaser at the time, recused himself and did
not participate in the negotiation of this transaction, and abstained from
voting on the transaction when Tyco's Board of Directors approved it. Mr. Fort's
equity interest in the investment partnership was considerably less than ten per
cent.
Following the Tyco/ADT merger in 1997, Lord Ashcroft KCMG, a Tyco
director and the former Chief Executive Officer of ADT, offered for sale his
residential property in Boca Raton, Florida. Mr. Kozlowski, who was then
contemplating a move to Boca Raton negotiated to buy Lord Ashcroft's
property. A sale of the property was consummated on October 24, 1997 for $2.5
million. Lord Ashcroft has advised the Company that he understood at the time
that he was selling the property to Mr. Kozlowski, and did not know until
more than two years later that the purchaser of the property was a Tyco
subsidiary, ADT. Upon learning of the true identity of the purchaser, Lord
Ashcroft inquired of Tyco's management, CFO Mark Swartz, whether the
transaction should be disclosed in the Company's proxy and Mr. Swartz
informed him that because Tyco explored competitive alternatives prior to
purchasing his property, it did not consider the transaction reportable. Tax
records confirm that the property was sold for at or near fair market value.
In April 1996, John F. Fort III sold to Mr. Kozlowski a property at 59
Harbor Road, Rye, New Hampshire where Mr. Fort had resided while CEO of Tyco.
Immediately prior to the closing in April 1996, Mr. Fort was notified that the
actual purchaser would be the GV Realty Trust, which Mr. Kozlowski represented
as his own realty trust in which he was the sole beneficiary. Although GV Realty
Trust was owned by Mr. Kozlowski, he caused Tyco to book the purchase to a
general ledger Tyco account. However, before the end of the year, the entry was
reversed and transferred to Mr. Kozlowski's personal KEL loan account, thereby
becoming a transaction that did not involve the Company.
During the Relevant Period, Stockwood, Inc., in which Frank E. Walsh,
Jr., a Tyco director until February 2002, has a controlling interest, leased an
aircraft to the Company during the period 1996 to 2002. Stockwood, Inc.
submitted and was paid for invoices totaling $2,490,319 for that lease.
Stockwood VII, Inc., in which Mr. Walsh also has a controlling interest,
provided pilot services to the Company. For the period 1996 to 2002, Stockwood
VII, Inc. submitted and was paid for invoices totaling $1,077,071. The
37
Company entered into each of these arrangements after seeking competitive bids.
The agreement was renewed annually to October 31, 2000. A second lease
arrangement was entered into from January 2001 and terminated February 2002.
In May 2001, after seeking competitive bids, Tyco entered into a
two-year lease agreement with Stephen Foss, a Tyco director, to lease a Cessna
Citation aircraft for a minimum monthly lease payment of $38,000 for 20 hours of
flight time. For the period May 2001 to May 2002, Tyco paid Mr. Foss a total of
$570,000. N.H. Helicopters, Inc., of which Mr. Foss is the president, also
provided pilot services to Tyco pursuant to a two-year agreement commencing on
the same date. For the period May 2001 to May 2002, Tyco paid N. H. Helicopters
a total of $181,101.24. On July 5, 2002, both agreements were amended to
terminate on September 30, 2002.
As set forth in Exhibit 10.4 to Tyco's Quarterly Report Form 10-Q for
the period ended June 30, 2002, Joshua M. Berman, a non-independent Tyco
director, had until February 29, 2000 been affiliated with a law firm that
served as outside counsel to Tyco. From March 1, 2000 to July 31, 2002 Mr.
Berman was employed directly by Tyco to render legal, regulatory and other
professional services. His compensation was at a rate of $360,000 per year,
without benefits (other than health benefits), and was in addition to normal
director's fees. Although the Company did not provide a Form W-2 to Mr. Berman
or the Internal Revenue Service, during this period Mr. Berman was an employee
of Tyco, as defined by Internal Revenue Code, Section 31.3121(d)-1.
As set forth in Exhibit 10.3 to Tyco's Quarterly Report Form 10-Q for
the period ended June 30, 2002, John F. Fort III, a non-independent Tyco
director, acted as Tyco's Primary Executive Officer with all the power of a
chief executive officer from June 1, 2002 until the appointment of the new Chief
Executive Officer, Edward D. Breen, on July 25, 2002. During this period, Mr.
Fort's compensation was $150,000 per month, without benefits, and he will
continue to receive this amount until the new Chief Executive Officer determines
that a transition is complete. This compensation includes transportation
expenses and other normal and customary expenses, as well as reimbursement for
New York taxes. Mr. Fort's compensation does not include any fringe benefits.
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
(c) Exhibits
99.1 Press Release of Tyco International Ltd., dated August 6, 2002. The
appointment of John A. Krol, former Chairman and CEO of E. I. DuPont,
to the Board of Directors.
99.2 Press Release of Tyco International Ltd., dated August 6, 2002. The
appointment of Eric M. Pillmore as Senior Vice President of Corporate
Governance.
38
99.3 Press Release of Tyco International Ltd., dated September 11, 2002. The
appointment of David J. FitzPatrick as Executive Vice President and
Chief Financial Officer.
99.4 Press Release of Tyco International Ltd., dated September 12, 2002. The
appointment of William B. Lytton as Executive Vice President and
General Counsel.
99.5 Press Release of Tyco International Ltd., dated September 12, 2002. The
nomination of Jerome B. York, Mackey J. McDonald, George W. Buckley,
Bruce S. Gordon, and Sandra Wijnberg to fill expected vacancies.
99.6 Tyco's Complaint in Tyco International Ltd. v. Frank E. Walsh, Jr., No.
02-CV-4633 (DLC).
99.7 Tyco's Complaint in Tyco International Ltd. v. Mark A. Belnick, No.
02-CV-4644 (SWK).
99.8 Tyco's Complaint in TYCO INTERNATIONAL LTD. AND TYCO INTERNATIONAL (US)
INC. V. L. DENNIS KOZLOWSKI, No. 01-CV-7317 (TPG).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TYCO INTERNATIONAL LTD.
By: /s/ Edward D. Breen
---------------------------------
Edward D. Breen
President and Chief
Executive Officer
Dated: September 17, 2002
39
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -------------------
99.1 Press Release of Tyco International Ltd., dated August 6, 2002. The
appointment of John A. Krol, former Chairman and CEO of E. I. DuPont,
to the Board of Directors.
99.2 Press Release of Tyco International Ltd., dated August 6, 2002. The
appointment of Eric M. Pillmore as Senior Vice President of Corporate
Governance.
99.3 Press Release of Tyco International Ltd., dated September 11, 2002. The
appointment of David J. FitzPatrick as Executive Vice President and
Chief Financial Officer.
99.4 Press Release of Tyco International Ltd., dated September 12, 2002. The
appointment of William B. Lytton as Executive Vice President and
General Counsel.
99.5 Press Release of Tyco International Ltd., dated September 12, 2002. The
nomination of Jerome B. York, Mackey J. McDonald, George W. Buckley,
Bruce S. Gordon, and Sandra Wijnberg to fill expected vacancies.
99.6 Tyco's Complaint in TYCO INTERNATIONAL LTD. V. FRANK E. WALSH, JR., No.
02-CV-4633)(DLC).
99.7 Tyco's Complaint in TYCO INTERNATIONAL LTD. V. MARK A. BELNICK, No.
02-CV-4644 (SWK).
99.8 Tyco's Complaint in Tyco International Ltd. and Tyco International (US)
Inc. v. L. Dennis Kozlowski, No. 02-CV-7317 (TPG).